As well as mitigating the risk inherent in certain trade transactions, such as the risk of nonpayment, trade finance can also enable sellers to access the short-term finance they need to do business. As such, it plays an important role in facilitating international trade, improving cash flow and supporting business growth.
We have different tools, techniques, and instruments that facilitate trade and protect both buyers and sellers from trade-related risks. We want to make it easier for businesses to transact with each other and we are helping to reduce the risks involved in global trade, for both buyers and sellers.
We are ware that both buyer and seller incur different types of risk.
For the buyer, there is a risk that the goods purchased will not arrive on time or will fall short of the expected quality or volume. T
While the seller faces the risk that payment will not be received on the agreed terms for the goods provided. These risks are exacerbated in an international trade transaction, as resolving any disputes can be time consuming and difficult – particularly when the markets involved have different cultures and regulatory climates.
To mitigate these risks, there are different ways of structuring trade transactions, including open account, payment in advance and letters of credit. We can facilite the latter.
Trade finance is important for companies for the following reasons:
- Provides business opportunities for small and medium scale enterprises.
- Provides chances to extend credit in specific conditions.
- Facilitates companies to receive cash payments
- Reduces payment risks for small businesses.
- Provides opportunities for financial scalability for companies
- Cash flow is increased with the help of trade finance
- Export and import trade finance ensures guaranteed payments
- Facilitates streamlined trading for companies
Letters of credit:
Trading transactions can be structured around different trade finance techniques. As mentioned above we can facilitate letters of credit (LCs or L/Cs), which are often used to guarantee and finance international trade.
The use of LCs is governed by rules published by the International Chamber of Commerce, known as the Uniform Customs and Practice for Documentary Credits. The current version, UCP 600, came into effect on 1st July 2007. In a letter of credit transaction, the buyer’s bank provides a letter guaranteeing that the seller will be paid in full and on time, as long as the necessary documentary conditions are met. The documents required may include bills of lading, insurance certificates and commercial invoices.
If the buyer is unable to make the payment, the bank will pay on the buyer’s behalf. As such, trade risks are mitigated for both the buyer and the seller. The seller receives a guarantee that they will receive payment as long as goods are received as agreed, while the risk to the buyer is addressed by the need for documentary proof that goods have been received. Different types of LC are used in international trade.
We can facilitate:
- Confirmed letter of credit – a letter of credit which includes an additional guarantee of payment from a second bank (the confirming bank).
- Revolving letter of credit – a single letter of credit that can be used to cover multiple transactions over a period of time.
- Standby letter of credit – a letter of credit that provides assurance the buyer is able to pay the buyer, in the expectation that the LC will not need to be used.
- Back-to-back letter of credit – two letters of credit used to connect the buyer and seller via an intermediary.
- Sight letter of credit – payment is made immediately once the necessary documents have been reviewed by the bank.
